The Contagion of Global Financial Crisis on Exchange Rate Volatility in Iran: Copula-GARCH Approach

Abstract

An important subject in the field of global economy is the financial crisis contagion on various markets. Given the expansion of trade relationships among different countries, proving the existence of contagion will facilitate policymaking in times of crisis. The present article tries to find the answer to the question of whether the Iranian foreign exchange market is affected by certain global crises. The answer may initially seem to be obvious; nevertheless, the channels of contagion or its share in market fluctuations cannot be confirmed if the existence of the phenomenon is not proved at first place. This study reviews the contagion effects of financial crises in selected crisis-stricken countries and those of oil and gold markets on Iran's free foreign exchange market, covering four crises including the US stock market crash, the Mexican financial crisis, SAARC, and the US subprime mortgage crisis during 1987-2008. For each crisis, stability periods were identified and using daily data and the Copula-GARCH model, the existence of contagion effects was studied. Findings indicated the contagion effects of the crises in the mentioned markets on the foreign exchange market. This was specifically witnessed in the case of the 2008 crisis with effects larger than others, manifesting themselves in the foreign exchange as well as the oil and gold markets. Therefore, part of the fluctuations in the market may be attributed to external factors, requiring the policymaker to avoid any intervention during global financial crisis or turbulence in the oil and gold markets.

Keywords

• contagion effects
• financial crises
• systemic risk
• the copula-garch model